The 240-min chart above details the market’s short-term momentum failure today below 01-Oct’s 192.95 smaller-degree corrective low and short-term risk parameter discussed in Fri’s Technical Webcast. This admittedly short-term bearish divergence defines yesterday’s 206.85 high as the end of at least the portion of the two-month recovery from 20-Sep’s 182.00 low and possibly the end of the entire two-month recovery from 02-Aug’s 174.50 low that, to this point, is only a 3-wave affair. Left unaltered by a recovery above 206.85, this two-month, 3-wave recovery may be considered a B- or 2nd-Wave correction of late-Jul’s 217.85 – 174.50 (A- or 1st-Wave) start to a much broader correction or reversal lower.
If correct, reinforced by commensurately larger-degree weakness below 20-Sep’s 182.00 larger-degree corrective low and key long-term risk parameter, a decline as steep and impulsive as late-Jul’s decline would be expected to unfold in the weeks immediately ahead and project to the 163.50-area or lower (i.e. 1.000 progression of 217.85 – 174.50 decline from 206.85).
Historically frothy sentiment/contrary opinion levels and waning upside momentum on a broader weekly basis below are reinforcing elements to such a broader peak/correction/reversal threat. Indeed, at a historically high 81% reading reflecting 56K Managed Money long positions to just 13K shorts, our RJO Bullish Sentiment Index indicates plenty of fuel for downside vulnerability if this market cannot now recoup 206.85.
These issues considered, traders are advised to move to a neutral-to-cautious-bearish stance with a recovery above 206.85 required to negate this call, reinstate the recovery and warrant a return to a cautious bullish policy. In lieu of such resumed strength, we believe this market has become vulnerable to what could be a relative shocker to the downside, even though such a sub-174.50 break could be part of just a major correction within the secular bull trend.
